Metric of the month No 7 – Customer Lifetime Value

What is Customer Lifetime Value and why is it important?

Customer Lifetime Value  (CLV) is a fantastic feel good measure for a business, as a healthy CLV shows that all the hard work which goes into acquiring customers has delivered positive financial value to the business with customers developing a long term relationship.    

It is an important metric to track, as it also offers a view of the long term business viability, through demonstrating strong brand loyalty, recurring revenue and a happy Marketing Director, as it costs less to retain these existing customers than sourcing and converting new leads. 

Maintaining a great CLV isn’t just the role of the Marketing team, it needs to be a core focus across the whole organisation. Having a clear retention strategy which nurtures these relationships is a must for extending these relationships, with tactics also in place to increase the frequency of purchases and their ultimate value in order to drive business growth.  

A truly customer centric business will be measuring their CLV, alongside tracking Net Promoter Scores used to measure customer loyalty and monitoring customer feedback scores for satisfaction levels.

What is a good customer lifetime value?

In general, if your CLV is at least three times more than the cost of acquisition, then you are on the right track.

But, with so much data to hand it can get very complicated to calculate CLV, particularly if you are a big company with many customer touchpoints along the customer journey. A simple way to get started with using this metric as an indicative guide at a business level is:

(Purchase Revenue in a year x average length time customers are retained) – the total costs of acquiring and serving customers in that same period = CLV   

For example, if you are selling beach holidays and your average CLV is £10,000 over a 3 year period and it cost you £2,500 to acquire them, be that through printing brochures, paying travel agency commission, special offers, or advertising spend, then you’d be happy with a £7,500 return on that initial investment.  But don’t forget to factor in the cost of that customer to your business across the 3 years (CTS – Cost to serve) and what it is taking to retain them and secure future purchases, such as the customer support team, call centre costs or remarketing efforts, loyalty scheme offers etc.

Nicky’s tips to improve your CLV

  • Enhance the customer journey and how your business interacts with clients at each touchpoint. Talking to your most valuable customers to understand why they remain loyal, but also where they have frustrations will give focus to your efforts to make those improvements which will build loyalty and advocacy with others.
  • Developing a loyalty scheme for your most valued customers, is also a great way to extend your relationships with them.  There is of course a cost to this, but manged carefully by treating them well it will deliver positive results. This could be as simple as offering VIP access to pre-released products.
  • Be consistent in your approach to customer service across all channels, pre-empting any issues and taking a personal approach to communications or post purchase follow ups.

If you would like help to improve the length of your Customer relationships or increase their lifetime value to you business – please do get in touch with Nicky.